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Reverse Mortgages:
 

      Many older Americans are turning to “reverse mortgages” to pay for medical treatment, finance a home improvement, buy long-term care insurance, or supplement their income. Reverse mortgages allow older consumers to convert the equity in their homes to cash while retaining home ownership.

      With a “regular” mortgage, you make monthly payments to the lender. But with a reverse mortgage, you receive money from the lender and generally do not have to repay it for as long as you live in your home.  In return, the lender holds some of your home’s equity. The proceeds of the loan are tax-free, there are no minimum income requirements, and for most reverse mortgages, the money can be used for any purpose.  However, a reverse mortgage may be more costly, so if you are considering a reverse mortgage, it’s important to understand how the loans work and what your rights and responsibilities are.

Types of Reverse Mortgages

  • The federally insured Home Equity Conversion Mortgage (HECM), administered by the Department of Housing and Urban Development (HUD)
  • Single-purpose reverse mortgages, usually offered by state or local government agencies for a specific reason
  • Proprietary reverse mortgages, offered by banks, mortgage companies, and other private lenders and backed by the companies that develop them

Qualification for a Reverse Mortgage

      You must be at least 62 and have paid off all or most of your home mortgage. Income is generally not a factor, and no medical tests or medical histories are required. If you seek an HECM, you must participate in mortgage counseling from an independent government-approved “housing agency.” Financial institutions offering proprietary reverse mortgages may require similar counseling or homeowner education.

      The amount you can borrow depends on your age, the equity in your home, the value of your home, and the interest rate. You can be paid in a lump sum, in monthly advances, through a line of credit, or a combination of all three. Federal law limits the maximum amount that can be paid out for an HECM.

Common Features

  • Reverse mortgages generally do not affect Social Security or Medicare benefits.
  • Most plans allow homeowners to retain title to their homes until they permanently move, sell their home, die, or reach the end of a pre-selected loan term.
  • Generally, a move is considered permanent when the homeowner has not lived in the home for 12 consecutive months. So, for example, a person could live in a nursing home or other medical facility for up to 12 months before the reverse mortgage would be due.
  • Reverse mortgages tend to be more costly than traditional loans because they are rising-debt loans. The interest is added to the principal loan balance each month.
  • Reverse mortgages use up all or some of the equity in a home. That leaves fewer assets for the homeowner and his or her heirs.
  • Lenders generally charge origination fees and closing costs; some charge servicing fees.
  • Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.
  • Because homeowners retain title to their home, they remain responsible for taxes, insurance, fuel, maintenance, and other housing expenses.

Shop Around and Compare Terms

  • Annual percentage rate (APR), which is the yearly cost of credit.
  • Type of interest rate. Some plans provide for fixed rate interest; others involve adjustable rates that change over the life of the loan based on market conditions.
  • Number of points (fees paid to the lender for the loan) and other closing costs.
  • Total amounts loan cost (TALC) rates. The TALC rate is the projected annual average cost of a reverse mortgage, including all itemized costs. It shows what the single all-inclusive interest rate would be if the lender could charge only interest and no fees or other costs.
  • Payment terms, including acceleration clauses. They state when the lender can declare the entire loan due immediately.
  • Choose your lender carefully as well. Look for the successful track record, size and strength of the financial institution.

      Under the Federal Truth in Lending Act, lenders must disclose these terms and other information before you sign the loan. For plans with adjustable rates, they must provide specific information about the variable rate feature. On plans with credit lines, the applicant must be informed about appraisal or credit report charges, attorney’s fees, or other costs associated with using the account. Be sure you understand these terms and costs.

      Reverse mortgages come with different provisions. For example, with some reverse mortgages, the lender may take a share of equity appreciation. This could create issues for the homeowner or heirs, particularly if the value of the home rises unex­pectedly during the loan. Carefully read any provision of the contract about shared appreciation.

      You generally have at least three business days after signing a reverse mortgage contract to cancel it. The cancellation must be in writing. For more information on this topic, visit the Federal Trade Commission website at www.ftc.gov or the web-site for the U.S. Department of Housing and Urban Development at www.hud.gov.

 

Information deemed reliable but not guaranteed.

Charlie Dunn
Berkshire Hathaway HomeServices California Properties
11306 183rd Street, Cerritos, CA 90703
Direct Line: 562-430-4007
Make Yours a "DunnDeal" 

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